From April 1 next year, a 12.5% tax credit on eligible expenditure will be available to business doing R&D in New Zealand; a business will be able to claim a tax credit for up to $120 million of R&D expenditure each year

A research and development tax credit will be made available to any business which stimulates innovation by growing its R&D activity, the Government has announced.

But the decision has leapfrogged the Tax Working Group, which was tasked with examining the structure, fairness and balance of New Zealand’s tax system.

Research, Science and Innovation Minister Megan Woods has launched a six-week public consultation period in a bid to have the tax credit ready in a year’s time.

From April 1 next year, a 12.5% tax credit on eligible expenditure will be available to business doing R&D in New Zealand.

A business will be able to claim a tax credit for up to $120 million of R&D expenditure each year, equating to a tax credit of $15 million each year, based on a 12.5% rate.

In the Labour/New Zealand First coalition document, the Government promised to “work to increase Research & Development spending to 2% of GDP over ten years.”

New Zealand’s current R&D expenditure is almost 1.3% of GDP meaning to reach its goal, a further $2 billion would need to be invested.

Even at 2%, New Zealand’s R&D expenditure would be below the OECD average of almost 2.4%.

Although sustained increases in Government investment will be important, there also needs to be an increasing contribution from the private sector, Woods says.

The R&D tax credit will be implemented by April 1 next year but over the next six weeks, the Ministry of Business, Innovation and Employment, Inland Revenue and Callaghan Innovation will be seeking public feedback on the proposal.

Revenue Minister Stuart Nash says it will be a simple process and will open access to those that have either struggled to access support or have been shut out of the process in the past.

Déjà vu

This is not the first time an R&D tax credit has been used in New Zealand.

A tax credit for R&D expenditure was included in the Business Tax Reform package of Budget 2007.

The resulting tax credit was short-lived and applied only for the 2008/09 income year before being abolished in favour of R&D related grants.

According to EY Partner Darren White, the tax credit could include the cost of employee remuneration, training and travel costs of employees conducting R&D, and payments to other entities commissioned to conduct R&D on behalf of the entity.

Under the previous Government, the tax credit was 15% but before the election, Labour said it would be 12.5%.

NZ First, however, favoured an R&D tax credit starting at 125% in the second year when a company invests 2% of its revenue on research, rising to 150% for the third consecutive year and 200% from year four onwards.

Visit MBIE’s website to read the R&D tax incentive discussion document and to make a submission here.